India taps NRIs with up to 7% interest on dollar deposits as forex woes rise

New Delhi: With India’s forex reserves getting depleted faster than expected due to the conflict in the Middle East, India is now wooing its 35 million strong diaspora, one of the largest in the world, to offer lucrative dollar deposits that can earn them up to 7% interest.

For this the Reserve Bank of India (RBI) has tweaked its Foreign Currency Non-Resident (Bank) FCNR(B) framework to offer pure US dollar deposits as India moves to unlock about $35-50 billion in capital inflows from its overseas citizens. 

What is an FCNR (B) Deposit and How Does the Scheme Work?

These deposits offer a strong financial mechanism for NRIs:

• Unlike a standard  Non-Resident External (NRE) account, a FCNR(B) account allows NRIs to maintain their savings entirely in foreign denominations. (USD, GBP or EUR).
• The interest earned is 100% exempt from Indian income and wealth taxes, making it an attractive wealth compounding investment vehicle. 
• Both the initial principal amount and the accrued interest are fully repatriable, where NRIs can seamlessly move their funds back to their country of residence at the time of maturity. 

The Secret Sauce: RBI Absorbs the Cost of “Hedging”

Usually, RBI cannot comfortably offer 7% interest as standard interest rates tend to remain much lower.  The RBI is also looking to pay the hedging fee for these deposits as it aims to attract more investors for these deposits. To boost exchange reserves, the RBI is now directly absorbing these hedging costs against currency fluctuations as it aims to offer competitive interest rates. 

Defensive Infrastructure Against Global Shocks

These deposits highlight the RBI’s proactive approach to national financial stability as it aims to address a combination of volatile global oil prices, steady interest rates, and the flight of capital from the country by FIIs.

By offering a high yield, tax-free safe haven for NRI wealth, India aims to use its loyal NRI base to create a non-debt-creating infrastructure funding pool, helping the economy remain stable on the global stage.